73 The Alabama Lawyer 356 (2012). U. S. Supreme Court Resolves Bankruptcy Circuit Split in Favor of Secured Creditors: Holds Credit-Bidding May Not Be Denied.

• Author: By Eric L. Pruitt and Scott S. Frederick

Alabama Bar Journal

2012.

73 The Alabama Lawyer 356 (2012).

U. S. Supreme Court Resolves Bankruptcy Circuit Split in Favor of Secured Creditors: Holds Credit-Bidding May Not Be Denied

U. S. Supreme Court Resolves Bankruptcy Circuit Split in Favor of Secured Creditors: Holds Credit-Bidding May Not Be DeniedBy Eric L. Pruitt and Scott S. Frederick"If you find yourself in a hole, stop digging" quipped Will Rogers.(fn1) Luckily for secured creditors, the United States Supreme Court's decision in RadLAX Gateway Hotel, LLC v. Amalgamated Bank allows just that.(fn2) Rather than deepen their predicament by throwing good money after bad, secured creditors facing cram-downs can credit-bid in a bankruptcy sale of assets through a plan of reorganization. RadLAXsettles a circuit split on the cramdown issue and, in today's bleak economic climate, provides a bright spot for secured creditors.

The story of the RadLAX case is not unfamiliar or unlikely. The debtors owned an airport hotel and parking garage, which was pledged as collateral for a $142 million loan. Battered by the tough economy and facing insolvency, the debtors filed for Chapter 11 bankruptcy in 2009. The debtors ultimately proposed a plan of reorganization with a stalking horse bidder that expressly prohibited secured creditors from "credit-bidding" at the auction and, instead, required them to bid cash.

Why does this matter? For secured creditors, bidding cash may be bad business or even impossible. Few creditors desire to sink new money into bankrupt ventures. Plus, creditors have their own cash flow issues that may prevent them from bidding cash in bankruptcy auc-tions-especially government creditors with limited appropriations authority.

This often leaves third parties to buy the properties at auction at deep discounts, forcing secured creditors to satisfy themselves with returns far below the collateral's full value. In contrast, if creditors are allowed to credit-bid, they can step in and bid the amount of their lien.(fn3) Often, they can take the property without additional cash outlays, thus protecting themselves from being shortchanged by opportunistic third parties.

RadLAX tells us once and for all that, in Chapter 11 plans of reorganization, debtors cannot stop creditors from credit-bidding.(fn4) How did we get here, though? The path begins in Chapter 11 of the Bankruptcy Code(fn5) and specifically in 11 U.S.C. § 1123 and 11 U.S.C. § 1129.(fn6) Under Chapter 11, bankruptcy cases follow a "'plan,' typically proposed by the debtor, which divides claims against the debtor into separate 'classes' and specifies the treatment each class will receive. Generally, a bankruptcy court may confirm a Chapter 11 plan only if each class of creditors affected by the plan consents."(fn7) If creditors do not consent, courts may still confirm the...